Won dips to 7-month low as foreign outflows pressure market

A private currency exchange in Myeong-dong, central Seoul, shows the won quoted at 1,476 per dollar, Monday. (Yonhap)
A private currency exchange in Myeong-dong, central Seoul, shows the won quoted at 1,476 per dollar, Monday. (Yonhap)

South Korean foreign exchange authorities and the National Pension Service, one of the world’s largest pension funds, have launched a new four-way consultative body to address the won’s recent depreciation against the dollar.

The Finance Ministry, Bank of Korea, NPS and its supervisory agency, the Health Ministry, convened the group’s first meeting Monday to assess how the pension fund’s rapidly expanding overseas investments are influencing the foreign exchange market.

“The consultative body will seek ways to harmonize the NPS’ investment returns with stability in the forex market going forward," the related authorities announced through a statement, released shortly after the forex market wrapped up daytime trading.

Though the statement did not elaborate on the discussed measures, the market expects the NPS' forex hedging strategy could be adjusted to increase dollar supply in the market, thereby strengthening the won.

The NPS has been cited as a key factor behind the won’s depreciation, as its strong demand for dollars exerts downward pressure on the currency. With 1,322 trillion won ($896 billion) under management, the fund invests 58 percent of its assets abroad.

By selling part of its dollar-denominated holdings through futures or forward contracts, the NPS could increase dollar supply and help stabilize the won.

The NPS’ forex hedging regulations allow room for an increase. The standard cap is 5 percent of its overseas assets, but that can rise to 15 percent during periods of heightened market volatility.

Pulling up the cap on hedging, however, could come at a cost, as greater exposure to a strong dollar generally enhances profitability.

The BOK and the NPS could extend their forex swap agreement, which has a $65 billion ceiling and is set to expire at the end of this year. The arrangement allows the NPS to secure dollars directly from the central bank for overseas investments, limiting the impact on the forex market.

In a separate meeting, Health Minister Jeong Eun-kyeong urged the National Pension Fund Management Committee to “respond swiftly based on careful market analysis to safeguard the profitability and stability of the NPS."

The announcement on the four-way consultative body came shortly after the won dipped to a seven-month low against the dollar on the Seoul forex market.

The won was quoted at 1,477.1 per dollar as of daytime trading’s close on Monday, losing 1.5 won from the previous session. Shortly before the close, it weakened to 1,477.3 per dollar during intraday trading. It was the weakest level of the won seen in more than seven months, since having touched 1,484.1 per dollar on April 9.

Though it started trade at 1,471.9 per dollar, marking a slight appreciation from the previous session, the won lost value in the afternoon as foreign investors shifted to heavy selling on the Kospi, offloading a total of 425 billion won on the main bourse.

As foreign investors unload Kospi shares, they convert their proceeds into dollars, driving up dollar demand and weighing on the won.

With foreign investors shifting to net sellers, the Kospi wrapped up trading at 3,846.06 points, down 7.2 points, or 0.19 percent, from the previous close.


silverstar@heraldcorp.com